2015.11.24    

                                                                             Park, Min Su

1. Outline

When domestic corporation is provided personal service based on professional knowledge from non-resident who has not domestic business place in Korea and pay them, duty of withholding tax is occurred.

Depending on the point of view, there can be discrepancy between personal service income and usage fee income. To find out usage fee and personal service income under taxation treaty, see as follows;

2. Fact

1) “A” which is domestic non profit organization got personal service (consulting advise) from non resident who is in USA and try to pay consulting fee.

2) The amount will be USD 30,000 and try to find out this is personal service income or usage fee income according to the Korea-USA treaty taxation.

3. Personal Service Income and Usage fee income

 
(1) Personal Service Income

Personal service income is the income provided by expert or a person who has professional knowledge disclosed to the public.

 (2) Usage Fee Income

Usage fee income is the income received from using of film, patent, similar poverty as right, knowledge, usage of experience and usage right.

Regardless non resident provide it overseas or domestic, it is taxed by limited tax rate. If consulting service is regarded as usage fee income it is taxed 15% (16% included residence tax) according to the Korean USA taxation treaty.

4. Judgement on the fact

 
(1) Knowledge and experience etc under usual service is regarded as personal service income regardless it can get patent or not.

Generally characteristic of usage income is as follows;

  ① Service supplier use his or her own knowledge.

② Cost is occurred for the accomplishment of the contract.

③ Supplying new output attained from accomplishment of contract and guarantee it. (law regulation 2010-0166, 2010, 06.29)

(2) But if non resident's know-how is belong to the closed high tech knowledge, it is usage fee income. Generally usage fee income is decided by whether usage of right and know-how is transferred or not under supplying service condition. Know-how supplier doesn't have guarantee duty for the result because know-how can be used by other party independently. ( 46017-5, 2003.1.16)

 (3) Question can be occurred whether the supplier's knowledge is disclosed knowledge or professional knowledge only non- resident have.

(Paying amount also should be considered compared with general paying amount)

5. Related Law

 
Korean- USA International Treaty Article 14.[Usage fee] [1979.10.20]

 (1) Usage fee should not excess 15% from total usage fee amount supplied by non-resident. No(2), (3) cases are excluded as follows;

(2) Excess 10% from total usage amount can not be taxed by supplier party for the copyright, literature, play, music, production of art work and reproduction right of non-resident.

 (3) If supplied domestic resident have business place overseas and it is related to right or poverty which occur usage fee, (1), (2) are not applied to this. In this case article 8 (business income) is applied.

 (4) Usage fee used in this article has meaning as follows;

a) All sorts of payment for copyright of the literature, art and scientific

  work, film for the television broadcasting, tape, movie file, drawing, secret process, secret formula, trademark or similar poverty, right, knowledge, experience, function(technology), ship or aircraft ( a lessor should not be work on service for the international transportation).

b) If the poverty, right (ship and aircraft is excluded) is sold, exchanged its amount equivalent to the productivity, usage and selling of the poverty and right. Usage fee related to mine, quarry and other fee is not included in usage fee.

(5) If the amount paid to the affiliate person is excess compared to the amount paid to non-affiliate person, this article is applied to the amount paid non affiliate person. In this case excess amount is applied to each treaty party by each country's law.

Korean-USA Treaty Article 18 [ Independent Personal Service ] [1979.10.20]

 (1) A resident, service provider who provides service independently can be taxed by their own country for the income. Taxation from other country is exempted excluding No. 2 case as follow.

 (2) Regarding on the personal service income taxation can be charged by other country with 3 cases as follows.

a) Case 1. A service provider stay in the other party's country for more than 183 days during taxation year.

b) Case 2 : The amount is over USD 3000 or equivalent to Korean Won with this.

c) Case 3 : If provider have stationary facility in other party's country over 183 days during taxation year. In this case taxation is applied to amount related to this facility.

Corporation Tax Law 93-132…7 [Classification between know-how and Personal Service]

 ① Information or know-how in law article 93, clause 9 is all closed technical information necessary for industrial reproduction of process or product regardless it is object of intellectual property rights. It is regarded as existence before provided. < revised 2001.11.01>

② Personal Service: If the service provided engineer is standardization technique or normal professional technique most technician have, it is defined as personal service according to decree article 132, Clause 5, No 4. <revised 2001.11.01>

③ Know-how or information in decree article 132 NO. 1 is defined as follow condition;

 1. Whether it has secret protection regulation or having special formula not to disclose to 3rd party.

 2. Whether personal service fee is highly excess the amount for providing personal service expenditure<revised 1996.8.1>

  3. Whether supplier should act special role to the information or know-how provided when provided user use the know-how and information.

 ④ When domestic corporation make a importing technique contract with foreign corporation, if the importing technique is mixed  with information or know-how of Article 132, clause 1 and clause 2 technique supporting service, the income is calculated as follows;  < revised 1996.08.01 >

1. If they are consisted of main section and others are subsidiary section among information, know-how and supporting technique service, the total paying amount for the contract is decided by the income of main section. <revised 1996.08.01>

2. Except 1 case, total paying amount is based on information, the size of paid know-how, working hours and weekly salary,  

    The amount for the information, know-how and supporting technique service is classified according to the reasonable standard and calculated. <revised 1996.08.01>

Usage Fee Income and Personal Service Income.